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International Economics > Chapter 8 > Flashcards

Chapter 8 Flashcards

1
Q

Assumptions of the Heckcher-Ohlin Theory

A
  1. Two-nations, two commodities, and two factors of production
  2. Both nations use the same technology in production
  3. Commodity X is labor intensive and commodity Y is capital intensive
  4. Both commodities are produced under constant returns to scale in both nations
  5. There is incomplete specialization in production in both nations. Even with free trade both nations continue to produce both commodities
  6. Tastes are equal in both nations.(The shape and location of Indifference curves are identical in both nations)
  7. There is perfect competition in both commodities and factor markets in both Nations
  8. There is perfect mobility of factors within each nation but no international factor mobility.
  9. There are no transportation costs, tarrifs, or other barriers to free international trade.
  10. All resources are fully employed in both nations.There are no unemployed resources or factors of production in either nation.
  11. International trade between the two nation is balanced.The total value of each nation’s exports equals the total value of the nation’s imports
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2
Q

The assumption of perfect competition in Heckscher-Ohlin Theory means.

A
  1. Two nations are too small to affect the price
  2. In long-run p=cost no economic profit
  3. Perfect Knowledge
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3
Q

Commodity Y is capital intensive if.

A

Capital-labor ratio (K/L) used in the production of Y is greater than (K/L) used in the production of X.

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4
Q

To measure the capital and labor intensity of the two commodities, it shouldn’t be measured in absolute terms but by

A

the amount (ratio) of capital per unit of labor

(i.e., K/L)

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5
Q

Two ways to define factor abundance

A
  1. In terms of physical units
  2. Relative factor prices
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6
Q

Nation 2 is capital abundant in terms of physical units if

A

The ratio of the total amount of capital to the total amount of labor (TK/TL) available in Nation 2 is greater than that in Nation 1

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7
Q

Nation 2 can have less capital than Nation 1 and still be the capital abundant nation if

A

TK/TL in Nation 2 exceeds TK/TL in Nation 1

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8
Q

Nation 2 is capital abundant in terms of relative factor prices if

A

the ratio of the rental price of capital to the price of labor (Pk/Pl) is lower in Nation 2 than in Nation 1

i.e., if Pk/Pl in Nation 2 is smaller than Pk/Pl in Nation 1

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9
Q

Rental price of capital is usually taken to be

A

the interest rate (r)

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10
Q

price of labor time is

A

the wage rate (w)

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11
Q

Pk/PL can be written as

A

r/w

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12
Q

It is not the absolute level of r that determines whether or not a nation is the K-abundant nation, but

A

r/w

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13
Q

The definition of factor abundance in terms of physical units considers only

A

the supply of factors

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14
Q

The definition of factor abundance in terms of physical units and in terms of factor prices may not give the same conclusion if

A

Demand is significantly different between the two countries

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15
Q

If demand is significantly different between the two countries then which definition should be used

A

relative factor prices

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16
Q

The two definitions of factor abundance give the same conclusions if

A

we have assumed that tastes, or demand preferences are the same in both nations

17
Q

If Nation 2 is K-abundant nation and commodity Y is the K-intensive commodity, then Nation 2 can

A

Produce relatively more of commodity Y than Nation 1.

18
Q

If Nation 1 is the L-abundant nation and commodity X is the L-intensive commodity, then Nation 1 can

A

produce relatively more of commodity X than Nation 2

19
Q

Production possibility frontier for nation 1 ____________ than the production frontier of Nation 2
(if we measure X along the horizontal axis)

Knowing that Nation 1 is L-abundant

A

is relatively flatter and
wider

20
Q

The Heckscher-Ohlin (H-O) theory can be presented in two theorems

A

1.The H-O theorem (which deals with and predicts the pattern of trade)
2. The factor-price equalization theorem (Paul Samuelson) (which deals with the effect of
international trade on factor prices)

21
Q

The H-O theorem:
Pattern of trade:

A

A nation will export the commodity whose production requires the intensive use of the nation’s relatively abundant and cheap factor and import the commodity whose production requires the intensive use of the nation’s relatively scarce and expensive factor

22
Q

According to H-O theorm, The relatively labor-rich nation exports

A

The relatively labor-intensive commodity

23
Q

According to H-O theorm, The relatively labor-rich nation imports

A

The relatively capital-intensive
commodity.

24
Q

Which theorm explains comparative advantage rather than assuming it

A

The H-O theorm

25
Q

The H-O model is often referred to as the

A

Factor proportions or factor endowment theory.

26
Q

What is the basic cause of comparative advantage and international trade according to H-O theorm

A

Relative factor abundance, or factor endowments

27
Q

According to the H-O theorem, what is the cause of pre-trade difference in relative commodity prices between two nations

A

The difference in relative
factor abundance and prices

28
Q

According to the Heckscher-Ohlin model Indifference curve I is common to both nations because

A

of the assumption of equal tastes

29
Q

The tangency of Indifference curve I to the production frontier of Nation 1 at point A define

A

The no trade equilibrium-relative commodity price of PA in Nation 1

30
Q

The tangency of Indifference curve I to the production frontier of Nation 2 at point A’ define

A

The no trade equilibrium-relative commodity price of PA’ in Nation 2

31
Q

Nation 1 has a comparative advantage in commodity X and Nation 2 in commodity Y if

PA and PA’ are the equilbrim price of nation 1 and 2 respectively

A

PA < PA’

32
Q

According to H-O theorm, With trade Nation 1 produces at point B, but where is point B?

A

Further right on Nation’s 1 PPF

Indicating that it increases the production of X

33
Q

PA and PA’ are

A

Tangent lines to the PPF at equilibrium point that determine the slope

34
Q

Nation 1 can reach point E by

A

producing at point B and by
exchanging X for Y

35
Q

According to H-O theorm, With trade Nation 2 produces at point B’, but where is point B’?

A

Further to the left on the Nation’s 2 PPF

Indicates that nation 2 increased the production of Y

36
Q

Nation 2 can reach point E by

A

producing at point B’ and by exchanging Y for X

37
Q

According to heckscher-ohlin model, Both nations gain from trade because

A

they consume on
higher indifference curve II

International Economics (11 decks)

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